In an important ruling in the Piramal Enterprises Limited’s case under the erstwhile VAT statute, the Bombay High Court (BHC) has reiterated that a business transfer as a going concern is to be treated as a slump sale, and the assets of the business cannot be dissected and subjected to VAT individually. This can be extrapolated to affirm an already held view that there is no GST applicability on a slump sale transaction.

In this case, although the VAT assessment for FY2010-11 concluded that the transaction was on a “going concern” basis and not subject to VAT, in 2017, a demand of INR2,607 crores (approx. US$314 million) was raised on the ground that the transaction included the transfer of a right to use intellectual property for a fixed period, which constituted a “sale” under Indian VAT law as then applicable.

The BHC held that: (i) as the sale was intended as a transfer of the business on a “going concern slump sale” basis, it must be treated as a sale of a single asset, and it was incorrect to dissect the entire transaction into assets and liabilities, contradicting the very nature of a slump sale; (ii) the BTA should be read as a whole and must be interpreted based on the parties’ intentions; and (iii) the allocation of the purchase price in the business transfer agreement for stamp duty purposes should not be misconstrued as redefining the transaction’s character for VAT purposes.

Care should be taken in drafting IP transfer/ license clauses in such transactions, so as to ensure that they do not come across as distinct from the underlying business in any way. The last thing a seller needs is 14 years of tax litigation.